Crowdfunding In 2014: Forecasts As Equity Crowdfunding Takes Off

 @natrudy
on December 23 2013 3:46 PM
Cash Piles
Plaintiffs' lawyers were awarded $316 million for their work on a case in Delaware. Reuters

Crowdfunding has seen its fair share of buzz in 2013, especially after regulators released rules for securities-based crowdfunding and eased advertising bans in the fall of 2013, and after fraud concerns plagued major sites like Kickstarter.

Here are some forecasts from crowdfunding experts for 2014. Raising money by selling securities to ordinary investors, in slices of $2,000 or $10,000, is expected to become legal by roughly mid-2014.  

1. A Potential Crowdfunding IPO

An initial public offering of a popular crowdfunding platform, on which ordinary folk raise money online from other small investors, could be in the works, according to Pepper Hamilton LLP securities attorney Brian Korn.

That could happen for a traditional crowdfunding site, like Indiegogo or Kickstarter. Or peer-to-peer lending, also known as "debt crowdfunding," could be part of the first public launch of a crowdfunding facilitator, Korn told IBTimes.

A peer-to-peer lending company launch could happen as more states permit such lending, which has been criticized as lightly regulated and risky to lenders who know little about defaults. New Jersey, Texas, Massachusetts and Ohio are among states which forbid peer-to-peer crowdfunding.

“Peer-to-peer lending (a form of debt crowdfunding) will continue its meteoric rise,” wrote Korn in an email to IBTimes. “I expect more portals will emerge offering different segments of the loan market – we should see a commercial and small business peer to peer for the first time.”

Sites like Indiegogo and Kickstarter, which are primarily donation-based, could start to accept equity-based crowdfunding, in an attempt to cash in their well-known brands, according to Korn.

Indiegogo previously told IBTimes in July it was exploring the equity-crowdfunding option for its own site. Kickstarter declined to comment to IBTimes on this topic.

CEO Perry Chen told AllThingsD in 2012 that Kickstarter would never do an IPO.

2. A Wave Of Advertising & PR, As Crowdfunding Becomes Professionalized

As a crowdfunded company or product launch starts to involve securities, investors, and regulatory scrutiny, it will quickly become professionalized, say experts.

Robert Hoskins, a crowdfunding public relations specialist, told IBTimes that as crowdfunding ventures become more like ordinary companies, they’ll likely retain marketing professionals, as the stakes climb higher.

“Crowdfunding is really just a fancy name for a product launch,” Hoskins told IBTimes. “When equity crowdfunding becomes legal, instead of people looking at a 30-day campaign, it’ll be more like a business launch, the way pre-IPO companies look at it.”

Hoskins usually charges $5,000 to help a 30-day crowdfunding campaign with publicity. He estimated that he’d retained 20 clients in 2013, and said crowdfunding entrepreneurs could no longer rely on social media to spread the word, in a fast-expanding market where companies struggle to stand out.

“You’re going to have to spend some money on advertising and marketing, the way you’re supposed to for a company,” he said. “That’s going to flood the industry.”

Some crowdfunding platforms have already led the way, like California-based Realty Mogul, which bought Bay Area billboard space and mulled sky writing in an effort to promote their platform.

The Securities and Exchange Commission removed a decades-long ban on advertising for private placements of capital earlier in 2013, paving the way for many firms to advertise investments to the general public.

Hoskins also predicts that someone will develop a universal ratings and recommendations system for crowdfunded projects, where people can see who else invested in a project and who "liked" or "disliked" a project, akin to Facebook Inc.’s (NASDAQ:FB) system. He maintains an index of crowdfunding sites, ranked by website traffic and popularity.

Other cottage industries accompanying the rise of crowdfunding could include due diligence services on crowdfunded projects, like CrowdCheck. Consumer advocates fear crowdfunding could be weighed down by fraud, since unsophisticated investors could pair off with inexperienced or crooked entrepreneurs. Compliance services for businesses fearful of angering the SEC also exist.

3. Real Estate Crowdfunding Continues Rise

Crowdfunding real estate investments should continue to grow in popularity in 2014, even as established players like Realty Mogul and Prodigy Network compete for market share.

“Real estate will continue to dominate,” Korn told IBTimes. He cited the tangible aspect of real estate investments – physical properties you can touch – as reducing fraud fears. He added that crowdfunding can “round off” the final parts of a larger real estate deal, backed by private finance or developers.

Prodigy Network CEO Rodrigo Niño told IBTimes in an interview that he planned significant advertising buys in late 2013 and early 2014, to publicize his real estate projects, including print and online ad purchases.

Prodigy Network plans a string of deals, mostly in New York, with much money provided by crowdfunding investors. The company expects to announce at least five more New York deals by 2015.

One recent project, an extended stay hotel known as AKA Wall Street, raised $25 million in crowdfunding from 70 foreign investors in six different countries. Another, the $175 million 17 John project, seeks crowdfunding in minimum slices of $100,000.

Prodigy Network offers investments only to accredited investors, defined by regulators as those with salaries over $200,000 or net worth over $1 million. The company has crowdfunded $171 million for Colombia’s tallest skyscraper, in Bogota, currently under construction, alongside an airport hub. That’s part of a portfolio of six partly crowdfunded properties, which pooled $265 million from 5200 investors in just over three years.

“Anywhere where I see global demand in large metropolitan areas is of interest to me,” Niño told IBTimes, of his expansion plans. Niño doesn’t have actual return-on-investment figures in hand, since his properties haven’t yet opened, but projects that returns will exceed 10 percent.

Smaller real estate crowdfunding platforms have also seen significant growth. Launched in June 2013, San Francisco’s RealtyShares raised $700,000 through 1200 registered investors by mid-November.

The company has focused on real estate in four states, but plans to expand, potentially to Chicago, New York, Nevada and Seattle, RealtyShares CEO Nav Athwal told IBTimes.

Next year, “we’ll see a lot of consolidation, with platforms buying other platforms,” said Athwal, citing the abundance of players in the crowdfunding space. He added that real estate-specific crowdfunding rules could be a boon, easing strict caps on capital raising for an expensive industry.

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